微晶片科技 (MCHP) 2008 Q3 法說會逐字稿

Good day, everyone and welcome to this Microchip technology, 3rd quarter, fiscal year 2008 conference call.

At this time, I would like to turn the call over to Microchip technology's Chief Financial Officer, Mr.

Gordon Parnell.

Thank you very much, and good afternoon everyone.

We will be making projections and forward-looking statements regarding future events and performance of the Company.

Such statements are predictions and actual results will differ materially.

We refer you to our 10K and 8K current reports filed with the SEC that identify important risk factors that may impact Microchip's business and results of operations.

In attendance with me are Steve Sanghi, and Ganesh Moorthy.

I will comment or the 3rd quarter performance and balance sheet and cash information.

And Steve Sanghi will give us the results and other pertinent matters regarding the business.

We will then be able to respond to investor a analyst questions.

Let's begin with net sales for the December quarter.

They were down 2.3% in the immediately proceeding quarter and up approximately 0.6% from net sales of $251 million in the prior year 3rd quarter.

We are continuing to include additional information on -- in the press release relating to as if 123R.

Non-GAAP results expseudothe adoption of this standard and in the December quarter a one time event.

Earnings per share on a non-GAAP basis were a record 39 cents per diluted share in the 3rd quarter of fiscal 2008 compared to $0.28 in the immediately proceeding quarter and $0.36 per diluted share in the prior year's 3rd quarter.

Non-GAAP net income was $82 million, a decrease of 2.5% from the immediately proceeding quarter and an increase of 3.1% from non-GAAP income in the prior year's 3rd quarter.

GAAP net indication for the December quarter was $81 million, inclusive of all share based compensation expenses and a one time event.

The impact on earnings in the December quarter was 7.3% and the tax matter increased earnings per share by $0.03 in the quarter.

The financial results of the December quarter include the incorporate ration of the convertible debt in December.

As we indicated in the conference call where we discussed the positive impact of the they have been increased $0.01 from the original guidance.

With represent I want to briefly outlike the accounting methodology as there have been questions on how this impacts earnings per share.

As we discussed on call in December the impact of the convertible is $0.03 to earnings.

This does not require that the shares underlying the deal will come back into the deal when the stock reaches the conversion price.

This means that Microchip will pay the $1.15 billion principle comeback at maturity and any appreciation above that price by delivering shares.

So there's no delusion until the stock price is above 34.16 and a $40 stock price the delusion would be approximately $5 million or 2005%.

I hope this helps the understanding of structure.

So back to the current quarter on a geographic basis, Asia revenues grew in the December quarter.

The results in Asia were in line with our expectations.

The Americas regions were down 5.6% sequentially and that region was impacted by economic conditions as well as the effect of the Christmas holidays.

Europe net sales were also impacted by seasonal affects by -- with net sales down 5.5% sequentially.

Asia is our largest jog fee, Europe related approximately 28% of sales and Americas approximately 26% of sales.

And again to remind you this measurement is based on where the product is delivered for manufacturing purposes but doesn't always necessarily where the design activity is taking place or where the con assumption is eventually occurring.

From an operating P&L information I will use gross margin and operating experience information prior to the effects of share based compensation.

The gms were 61.2% in the December quarter, reaching record levels.

Operating expenses were 26.5% of sales in the December quarter a compared with the prior quarter which was 25.5% of sales.

Research and development costs were $27.6 million, representing 10.9% of sales.

Selling, general, and administrative were $39.4 million.

And on a full GAAP basis, gross margins were 60.6%, including share based compensation.

Research and development and SG&A expenses in total were $73.8 million.

The tax rate for the December quarter was 18.5% on a non-GAAP basis and the GAAP tax rate which calculated to 12.2% includes the one time adjustment I mentioned earlier in the call.

The tax rate is impacted by the mix of geographic profits and the percentage of tax invested in tax advantage securities.

The dividend of $0.32 a share was an increase of 3.2 sequentially and an increase of 20.8% over 2007.

The dividend payment that we'll make in the march quarter will be approximately $60.6 million.

Turning to the balance sheet, our inventories were essentially flat at $124.8 million in the December quarter compared to the prior quarter and represent approximately 114 days of inventory.

Our deferred input to distributors was unchanged.

Distributers were holding about 9.1 months of inventory.

The combined inventories on balance sheet and at distributors represent 149 days of total inventory which is an increase of seven days from the prior quarter.

Microchip's receivables were $113.4 million or a decrease of 111.5%.

Performance by our customers continues to be excellent with minimal balances beyond terms.

On a cash position, Microchip's cash and total investment was as of December 31st.

During the quarter Microchip generated net cash flow from the business of $131 million, payments related to our cash dividend of $0.31 was $64 million and the cash used in our stock buyback was we anticipate building approximately $105 million in operatal cash flow in the March quarter.

Capital spending in the December quarter was approximately $1.8 million.

Depreciation expense for December was $33.4 million and $25.4 million in the September quarter.

Our captial expendtitures forecast is currently $65 million for fiscal 2008, and depreciation forecast is $98 million for the same period.

With that I'll ask Ganesh and Steve to discuss performance of business, the March guidance and other business matters.

Good afternoon everyone, I will not comment on individual product license, after witch Steve will walk you through the guidance.

The microcontroller business was down 1% sequentially and up 1.5% from the year ago quarter.

The flash microcontroller was up half a% on a sequential basis and they now represent 73% of our overall microcontroller business.

Calendar 2007 culminated with our shipment of our 6 billionth microcontroller in December.

And started with the 600 thousandth development tool in January.

Both that lead our position in the microcontroller market.

Speaking of development tool shipments we shipped a record 728,322 in the quarter.

And in the first development tools about 40% higher than the recording Peter in fiscal year '08.

Those results are indicative of continued strong design ackivity and should bode well for future growth.

We had another strong quarter with revenue up almost 28% sequentially and over 138% from the year ago quarter.

The design momentum continues to build across a broad range of customers and applications.

We shipped bringing the total number of 16-bit tools ship to date to and significantly in the first nine months of fig fist call year '08 we have shipped twice the number in the elent time frame in '07.

We have more sampling and expect to exit March quarter with 150 products in production.

The number of 16-bit volume customers grew to 1,117 from 1,018 in the September quarter and in terms of 16-bit customers of all volumes that number remains in the several thousands.

We introduced our 32 bit microcontroller line in December, giving us access to we are launching a 32 bit product line at a time when the 16-bit business is strong and as we have told you before, the 16-bit product line competes with the low end of 32 bit market and we now believe we have address a larger portion with this product line.

The customer interest is high and industry ac Slade started to come in.

With EDM magazine selecting the product for the hot products of 2007 list.

While we expect the design cycles to be long.

We finally while the microcontroller market share information for 2007 is not yet available to compare to the results of our 8-bit microcontroller business, we believe that the performance of our 8-bit business in 2007 was purely the result of environmental factors and we believe we are maintaining or gain market share with enhanced demand creation initiatives.

The analog business was down 2.4% sequentially.

While we're not satisfied with these results they are reflective of industry conditions as seen in our peer company results as well as the norm seasonality in this business segment.

We are encouraged in the design activity.

The memory business was down 9% sequentially and 1.5% from the year ago quarter.

Sales were impacted in part by express inventory that resulted from shortages in the quarter as well as normal seasonality in this segment.

Pricing let me pass it to Steve for general guidance.

Thank you, Ganesh and good afternoon, everyone.

Today, I would like to first to reflect on results of the December quarter, then I will discuss the macro environment as we see it and finally I will pride guidance for the March 2008 quarter.

I'm pleased with our execution in the December quarter, amidst challenging industry conditions.

Your net sales were down 2.3%, is rightly better than the midpoint of our guidance but we exceeded gross margin guidance and achieved an all time record high gross margin of 61% 2% on a non-GAAP basis.

We also achieved the high end of our earnings per share guidance, both GAAP and non-GAAP.

During the quarter, we also completed a $1.1 billion convert transaction and in the last six months we have now bought back 31 million shares of our stock worth $965 million.

Now I will discuss the macro environment as we see it.

When Microchip first revised our guidance on October 8th, some investors and able itses did not agree with the market data that we were providing.

They did not believe that the conditions we were experiences were more pervasive in the industry.

Many believed that Microchip was losing market share and that our gross margin would be sustainable.

We went through great lengths to explain in our conference call that we were seeing the effects of housing market filter into the broader economy and Microchip often sees the effect of industry events one to one and a half quarters ahead of our pierce.

It was some work because of our conservative revenue recognition policy, our focus on smaller customers who act more quickly and our end market focus which is more dominated than our peers and competitors.

Another reason why we see the effect of economic events earlier is our industry-leading short lead times allow customers to be more dynamic in how they adjust their demand on us.

Now we believed that the other companies would start to see the effect in a quarter or so.

We have certainly seen this scenario play out at several industry macro events in the past and the industry results in the current environment show that the scenario steems be playing out as we predicted.

Now with another quarter behind us, the market has responded to the changing conditions in the industry and affected evallations in the data now available.

The effect in the housing market is now being acknowledges bymy -- many analysts.

Philadelphia semiconduct Erin Dex stocks is down more than the decline in Microchip's price.

And the stock of most of our peers and competitors are down more significantly than Microchip stock price.

With this result, market is obviously recognizing strength of our business model and the results that we are delivering.

Now some investors and analysts were concerned after October 8 that Microchip would see urn usual price pressure in the microcontroller market and grandmothers would not be sustainable.

Gross margins actually increased to another record high of 61.2%, up 80 basis points from the previous quarter so continues to be very encouraging news in the business which certainly reflects in our forward guidance.

We saw some stabilization in the housing segment of market.

Let me explain that.

Our shipments to the housing customers consists of product going into new houses, as well as going into existing houses for remodeling as well as replacement.

For many appliances, up to two third of the shipments go into existing houses.

We have seen components going into the new houses fall to very low levels, consistent with the housing day.

That the Microchip U.S.

housing index was actually up last quarter from the previous quarter.

We believe that the U.S.

housing index for Microchip is currently bumping at bottom.

While the new housing market will probably gown further we believe that the new descience from hundreds of new products may put a floor on the business here.

So as I sum up the environment, I note that wile we are sitting at the trough of our revenue curve for this business cycle, we're enjoying Robert gross margins and record earnings per share on a non-GAAP basis.

We are keeping expenses and captial expendtitureses in the Company very tight will be able to weather any economic storm that may be on way.

We are getting traction in our 8-bit flash controllers and 16-bit microcontrollers.

As the revenue on these product license grows it presents excellent hunts for expansion and earnings per share gains.

I would like to add that 2007 was sort of a year of PCs and cell phones, especially in the last six months, and Microchip has lower exposure to these segments.

Now you are seeing that PCs and cell phones are going through inventory corrections which are really less likely to effect Microchip's business.

Our segment has really gone you will significant correction already and that's why we believe our revenues are at bottom.

Our book-to-bill ratio for decision quarter was approximately 10052, up from September quarter book to built of 0.94.

The starting backlog for March quarter is also significantly higher than the starting backlog was for the December quarter.

However as I've told you before, book-to-bill ratios and starting backlogs have not correlated well to our results in the past.

We are also giving consideration to the lunar New Year holidays in Asia in the current quarter.

We expect that our next say -- sales to be down 2% to up 4% sequentially.

We expect to achieve another record gross margin of 6.3 to 671.5% on a non-GAAP basis.

Now the earnings per share calculation this quarter gets really complicated with the effects of convert transaction and stock buybacks which are very positive and the one time favor tax matter in December quarter, which is unrepeatable.

In addition, fed's lowering of the interest rates knock Aspeny out of the earnings.

It knock Aspeny out of earningsing because of reduction in interest income and we have not made any ashames about further interest rate moves by the fed.

Taking all this into account, our non-GAAP EPS is expected to be 39 to $0.42s and ourcap EPS is expected to be 35 to $0.38.

With that, operator, will you please poll for questions?

?and-a (OPERATOR INSTRUCTIONS)

We'll take our first question from Craig Ellis from Citi.

Go ahead, Craig.

We'll go next to Chris Danely, with J.P.

Morgannen.

Can you hear me?

Yeah.

Can you talk about what percentage of revenue your housing index represents of Microchip now and what it was at peak or how much its fallen?

Well, Chris, those numbers are very, very rough to get.

As we mentioned when you put the index together, customers move their descience back and forth from here to Asia there are a lot of new designs that constantly go to while the index was up from last quarter it's a combination of a lot of the moving parts and a very complex equation.

You can't cleanly get at doing a bunch of analysis out of.

That when we originally announced the index we believed that U.S.

housing exposure was about 8%.

And it probably was even higher last year because we created the index from the March quarter where the numbers had already gone down and we think it's down substantially from that number today.

Do you have a follow up?

We'll take our next question from Simona Jankowski with Goldman Sachs.

Yes, hi, thanks, curious on your revenue guidance.

Considering your starting with a higher backlog and a lot of the other companies in the space were assuming thereat or higher turns for this quarter.

I was just curious are you more conservative because of the macro environment are you seeing things with your customers to guide lower but with a higher range of guidance than historically?

If you look at the history of what we have said on this conference call, we don't believe in book-to-bill ratio or starting backlog.

When book to bill and starting backlog looks better, the numbers could be better.

And when the book to bill lower and the starting backlog is lower, at that time we always say it doesn't matter either.

We believe that you know, starting backlogs and book to bill, just vary randomly sometimes where lots of customers could put in order at the end of quarter where other times it's at the beginning of quarter.

And ratio has not correlated well to our business.

We really go to a bottoms up analysis by sales guide by channel by customers and by regions and market segments and from there we have really instructed that number.

If you purely do a mathematical calculation the urns are lower but we have to go through Chinese New Year when our largest market is closed.

Is there anything in your customers behavior that suggests in change this the turns you are expecting this quarter?

The overall macro environment.

Your question was relative to linear and others and we have shown the last six months we have shown that our business does not correlate.

Our exposure is different.

We go to the quarters a quarter and a half ahead of everybody else.

We are guiding flat to up.

So you know, our results already don't correlate with the other companies, therefore the behavior of customers and the -- and the turns model doesn't correlate either.

We'll take your next question from UBS.

Your guidance about seeing a trough here in the housing and potentially overall in sales is encouraging but without asking you to try to be an economist, how do you see it going beyond the current quarter, the concern is the shape of recovery will be very much a U-shaped recovery with the concern that whatever recovery is very slow and gradual.

Well, you know, number one, we haven't really given you any longer term guidance sow have to put your own assessment.

Secondly, you know, I have counted number of times that this has happened that during prior inventory corrections and again now, you know, every time when we have a revenue miss, very often it's a quarter to quarter and a half ahead of industry.

And when we come up with that, nobody tends to believe it.

You know, if you just had -- if the world had believed what we had said on October 88th and taken action -- 8th.

At that time was a Microchip problem and everybody else was fine.

And you can see in a quarter, quarter and a half everybody has caught up to that.

We, at the same time see this recovery ahead of everybody else and we have shown that also.

It's clearly evident in our book-to-bill ratio.

I listened to another company's call whose book to bill labor was 0.88.

Ours was 1.2.

There is a significant difference the market segments.

Their market was a lot more exposure to PCs.

Ours is more industrial and consumer and less PC and less cell phones.

It's a very, very different model and it seems to be predictable.

We have done this over and over and over and it takes effort to get through it every time to explain it and it does not really get the footing until the numbers come out which are coming out now.

So now the question becomes why would we recover?

Well, same reason why we recover every time.

The new products are growing traction is good in design.

The development tools are a record.

The 6 bit was up 28%.

Even in a bad market, new designs are onverting and upgrading products and so on and so forth.

In the housing segment, a large portion of our product going into the housing segment is going into replacement segment, as I tried to explain.

It's so small now that can't really effect very much.

While we kind of suffered in 2007 because of lower exposure in PCs and cell phones, this now works for us because those are the segments now hurting and we see our segment doing better

great.

That's very helpful.

And as a follow up housekeeping question.

On tax rate should we assume the 18.5% going forward or is that just for Q4?

Oh, beyond into 2009?

That seems like range of our tax rate.

Obviously it might vary dependent on where we invest our cash balances and our mix of geographic profits.

But somewhere if that range is probably reasonable for fiscal '09

Great, thank you.

Once again, please press star, 1 if you'd like to ask a question at this time.

We will take our next question from Doug Freedman from AmTech Research.

Thanks for taking me question.

Could you talk a little bit about, you know, the pace at which you're seeing the design activity or are your customers also starting to feel better about the environment in which they are buying?

They don't tell us when their environment is good or bad.

We know there is design ackivity taking place in all times.

We are engaged in the designs and winning more than our fair share of designs.

So that end customer decides their comfort level.

But we are working to make sure that we are the choice they use many designed.

Is there any way to quantity fie what's happening as sort of the move to the higher integrated the microcontrollers not just bits but the one with more function not guilty on it.

Are you tracking that in any way?

We don't track it at that level.

When we look at it we look at the customer needs there are.

The simple microcontrollers fill those needs.

As we have grown our port owe we have a large you number of products that can service a broader market.

Previous, designs we could not get to in prior years we can get to now.

We are looking for growth across the board not just the higher end for growth we are looking for it across board.

All right, great.

And a real quick one or in the press release you mentioned you have 12 million shares available under the stock repurchase program.

Where does that number stand today?

That's the number.

12million.

that's the number.

We didn't really buy stock in the quiet period while we were on close to the end of quarter.

So when we go into the quiet period we cut off buying the stocks.

The window would open in the next couple of days and then we might resume that ackivity.

Terrific, thank you.

We'll take our next question from [ Inaudible ] with Morgan Stanley.

How much of the convert was offer and how much of the overallotment was exercised?

The entire overallotment was exercised

it was to use everything from that convertible offering to buy back stock do I understand that correctly?

Over time that was our intention.

over time.

By time overallotment got exercised we couldn't by more stock.

I believe it was exercised on 20th or December or something.

Correct.

It got exercised but we have not bought more.

Understand.

And the follow up question for Gordon, the long term investments kale down a couple hundred dollars was that due to timing and associated with that, we some companies had to write down some of their investments, you know, how comfortable are you guys that you're safe on that front?

Thank you.

The reduction in the long term investment is timing and really is nothing related to valuation.

As we pointed out many our Qs that there are $25 million of optionable securities that are liquid at this time.

And that's is not a liquidity event that has any concern for us at this stage.

Great, thank you, very much.

We'll take our next question from general and administrative with Garfield Associates.

Hi, you've answered the question, thank you.

Thank you, Gil.

Our next question comes from Chris Danely with J.P.

Morgannen.

Hopefully I don't get cut off this time.

You can discuss what your gross margin and inventory trends to do after the March quarter?

Well, I think, you know, we have guided our longer term, non-GAAP gross margin to be 62, 61.2 in the December quarter.

We are guiding 61.3 to 61.5 in the March quarter.

Center point of that you have 60 basis point to go.

And we will continue to go up, 20, 25 points, marg to 62.

In terms of inventory, Gordon?

It depends on environment and the revenue.

We are certainly happy that our inventory in dollars and on delete were flat quarter to quarter.

You we are not building dollars in inventory.

Increase in days was due to the fact that the hopefully we'll see declines in inventory in days over the next year or so.

So at midpoint inventory would be roughly?

Midpoint of?

Midpoint of guidance?

That sounds normal.

And on rest of the business, the MCU is doing okay.

On the E squared business it dipped 9%.

Do you see more aggressive pricing and if it is getting more give because of the broader concern in semies would you shy away?

We have been disciplined in how we run E squared business.

What you saw in the decline if you look at the September quarter results you saw a growth in the business.

Some of that growth occurred because of shortages of certain products.

We had the availability and took advantage of it in that time frame.

And it's versus that September comparison.

Other than that the normal pricing pressure.

It's moderate from quarter to quarter.

Okay.

And then last question for Steve, more big picture.

We've talked about the commission arrangement for a while.

Now you have had time between that decision and now, do you think it was the right thing do?

Are you looking to change that?

Do you feel any inity from the distributors toward Microchip?

Can you comment on that?

It was absolutely the right thing to do.

When we make these corporate kind of calls we do them under a whole bunch of analysis.

It's always misunderstood by street.

You know, we had done a large amount of analysis with creating what demand and based on, that you know, with a lot of discussion with the board and among ourselves Wes took on a task to move the reward and move or resources in the favor of more demand-creating channels and you know, less in the favor of channels that were not creating demand.

We believe the results have been very positive.

The first step of those changes was taken almost 40 years ago and our business has done very well with the growth in 16-bit and development tools and others.

We have added a number of regional distributes around the world in Europe and Asia and other places.

We are happy with what we have.

We tweak edit and always looking for changes and making it better.

And we have added micro chips 18 months ago.

And with the design cycle 18 months to two years, if you look at funnel.

Funnel is our way -- what's in funnel and opportunity base and design wins.

And funnel is significantly larger than it was a couple years ago.

And as the designs come to mature I, we are optimistic that the changes will be good for the business.

Is there any way you can estimate the amount of SG&A the micro chip direct has resulted in?

Well, yeah, we know that.

I don't think I'm going to give a number off the top of my head.

We know how many people we added from that program and the total cost, yes.

The question I was trying to get at is it has helped margin but do you think the margin benefit has outweighed the additional SG&A?

The program was not structured to create, you know, net additional benefit, the program was created to invest the savings and help for higher demand creation so Microchip could grow.

A lot of money we got from the margin side we reinvested in the SG&A.

On net, did it even out?

Was the margin a little bit higher, could be.

But it's not really huge amount and it was not structured to create, you know, additional profit dollars for Microchip.

It was structured to free up dollars so we could reinvest them in selling our 16-bit and our motor control, our ethernet products, as Ganesh mentioned earlier, we have a lot of highly integrated products.

But these are more complex and require a higher level of support for the customer.

We needed to add specialists around world that understand these things.

These experts are the ones that are helping to sell a lot of these products.

That's why 16-bit microcontroller is up 136% year-over-year.

And distributors have not created a single design for 16-bit when we made that decision.

Thankses, that's very helpful.

We'll take our next question from with Merrill Lynch.

Thanks for taking question.

In terms our your inventory it's still high and I understand that most of products don't get obsolete but is there a policy you follow to make inventory adjustments if you project the products won't sell in six months?

We are to good times and in bad.

And if there are effects of those in a period they roll through the grand slam.

There is no change the policies in extending runway in terms of looking at products.

We are consistent and will continue to be so.

One housekeeping i.

What should we model for net interest expense and diluted share count for March quarter?

Any buybacks in the March quarter is going to be driven from the conditions in the marketplace and we'll make those decisions as we go through.

We can't give you any direction on that specifically.

You know, interest income and expense, interest expense is probably easier to train late to.

That is going be driven from the convert and the expenses on that transaction.

It's going to be about $6.3 million on a quarterly basis.

And our interest income is going to be a factor driven from the type of investments we make.

Whether it's tack advantage whether there are further adjustments in the interest rate from the fed or additional changes.

That is many the range of 1.5 to $13 million as we look at it today.

But again, as we say, we have to take into consideration any changes in rates and how that would effect the continuity of the roll out of our other investments from -- into future periods which may be go beyond the end of the current period.

And share count?

Share count is going to be somewhere in the 195 million shares in terms of the current quarter.

And that's taking into consideration the full impact of the convertible transaction for the entire quarter.

But no additional buybacks.

No additional buybacks, and again those would be additional, incremental.

(OPERATOR INSTRUCTIONS) we'll take our next question from Kevin Cassidy with Thomas Weisel partners.

Thank you for taking me question.

A lot of my questions have been answered.

But when you're looking at 1st quarter how do you see it geography wise?

Do you see Americas and Europe being flat and Asia the only one down

when you see 1st quarter, you mean the fiscal 4th quarter?

I'm sorry, the March quarter.

as for Mercks is concerned, nobody really wants to do manufacturing in America.

So you know, what I would say, I would make a bold statement that America would be almost flattish, almost forever and to measure America simply by what we are shipping into America is increasingly not right.

It doesn't tell anybody, anything.

But it's very, very hard to really recapture when you have 60,000 customers it's hard to capture who's manufacturing where at what subcontractor.

When I El you about the 4th quarter, the biggest growth will come out of Europe because Europe just has have large number of working days in the 1st quarter.

In this current quarter they had a significant number of holidays.

Asia is flat to slightly down because of Chinese New Year and America is flattish.

Okay, thank you.

Moat of the growth comes out of Europe this quarter.

We'll take our next question from Romit Shah from Lehman Brothers.

If my memory serves me correct, a year ago, the fiscal 4th quarter of '07 When you guys were coming off an inventory correction you made the comment you were seeing an increase in exdied requests that that was fueling the belief that we were heading to a recovery are you seeing that this time around?

We are seeing an incredible number of expedited work, absolutely.

And is it tied to a particular region or particular end market?

No, it's pretty broad based.

A lot of them come from distributors.

We do a lot of business from distribution.

There is also in all jog face.

It's driven by very low inventory the channels and customers.

Everybody has low visibility.

The customers are building products on short lead time requests from their customers.

So the entire chain is expedited.

Nobody wants to take the risk and has the inventory.

So expedite requests are just incredible.

Advent has reasonable numbers today.

Are these distributors or the ones you work with do you feel they're ordering at a rate that's faster than what they're selling through to the end customer?

Well, last quarter

I mean our distribution is flat quarter to quarter.

They are buying what they're selling through and that's really situation that we would expect.

Our deferred margin, as I mentioned, was unchanged quarter to quarter.

Usually when inventories are low and you're coming out of a period with a few quarters of negative growth they end to order at a faster rate than they're selling through.

we tend to have a short lead times which accommodates their ability to manage their capital effectively.

That results in expedites on occasion because they obviously sometimes misread their own market.

Let me again say you know, that I time you apply, you know, the common industry wisdom to our business you're probably going to get wrong answer.

And that's why we have different cyclicality than the industry.

The majority of our distributors are small distributors.

Approximately, let's say, Gordon what portion of our business is distribution?

About 65%.

65%.

Over 40% of that 65% of business is through very small distributors.

Who are dedicates to Microchip around world.

These are not the guys that are heavily capitalized.

And because of our very, very short lead times and they're able to deliver it to their customers.

So what you call the traditional large global distributors are a smaller portion of our business than many some of your other investments.

Those are the guys that are capable of holding more inventory but they are not either because they are driven by the turn on is asset.

So the people with the cash aren't holding larger inventory either.

Inventory in the channel is quite low.

And we do not see.

We haven't seen distribution inventory grow in five years.

Sure.

we have gone through corrections and expansions.

It's 1.8, 1.9, two months.

We believe it's our job to make sure that the product is available at a moment's notice and our manufacturing is geared to be able to produce it and that's why customers prefer to design with us.

And many times customers want to buy that from the distribution.

So we provide it through the distribution and distribution makes the appropriate amount of margin for what he has done.

The distribution gets paid equal and to the amount of work they have done in creating that design.

Okay.

And if I could just on 16-bit, are you satisfied with the performance in that business?

Absolutely 16-bit is doing extremely well.

We will increase the number of products on the market by 16% this quarter.

Business is up 138% year-over-year.

Do we want to be larger, could we have done better?

Yes.

I could say that about any part of my business.

We want improvement every i.

And do you disclose the size of that business?

No.

Okay.

Thanks.

And it appear there is are no further questions at this time.

Mr.

Steve Sanghi I would like to turn it back to you.

We want to thank our investors to stick by.

We have gone through a fairly difficult environment here.

We are out of this.

We are sitting, dumping at bottom and looking for good things to happen in the coming year.

And we'll see many of you on road shows and conferences.

So thank you very much.

Bye, bye.

Thank you for your participation this concludes today's conference.

You may now disconnect.